By Fatima, TON Sri Lanka

With Sri Lanka still facing its worst ever socio-economic and political crisis since independence in 1948, the incumbent President is striving to pull the country out of its debt crisis. The cost of living is soaring and millions of families are in the poverty trap finding it hard to deliver two if not three meals a day, rudimentary healthcare services and a suitable education for their children. The parents know that higher education is vigorous for their children because it would play a key role there and determine their status in society.  

It was the South Asian country’s first default since becoming an independent country in 1948. Sri Lanka isn’t alone: Several other countries are in similar and disastrous financial straits.During the Covid-19 pandemic, there has been a dramatic increase in national debt levels across the world, with reported cases of downgrading sovereign debt ratings and difficulty of fulfilling debt obligations heavily concentrated in low and middle-income countries. In this situation, the unfolding sovereign debt crisis in Sri Lanka has attracted worldwide.

The Sri Lankan crisis encompassing both the sources of vulnerability to the Covid-19 shock, and debt arranging and stabilization improvements after the debt failure. When the Covid-19 shock triggered the crisis, the Sri Lankan government treated it as a modest balance- of-payments trouble that would dissipate together with the epidemic, while overlooking the systemic challenge of dealing with the massive debt overhang evolved over the previous two decades.

After the default, Sri Lanka’s policy challenge is to transform the ‘twin deficit’ economy, characterized by ‘stop-go’ growth cycle, into a vibrant, outward oriented economy that can distribute sustainable, equitable growth. The prime focus of the standard IMF approach to economic stabilization is on fiscal consolidation. It is necessary to combine fiscal consolidation with clear expenditure switching policies to redress the long-standing anti-tradable bias in the incentive structure that has reinforced the susceptibility of the economy to external tremors.

International organizations like the International Monetary Fund, the Paris Club, USAID, and the World Bank are aware of Sri Lanka’s debt crisis but do not intend to extend further investments. The World Bank said in May that it does not plan to offer new financing but is repurposing resources to help vulnerable families. Countries like China are also being asked to consider restructuring high-interest loan repayments as they have done for other countries. However, the country has not confirmed that vicissitudes will be made.

While economic distress is weighing down all South Asian countries, some are managing better than others. The reappearance of tourism is helping to motivate growth in Maldives, and to a smaller extent in Nepal both of which have active services sectors. The combined effects of COVID-19 and the record-high commodity prices due to the war in Ukraine took a heavier toll on Sri Lanka, worsening its debt woes and reducing foreign reserves. As Sri Lanka is in its worst-ever economic crisis since independence.  Sri Lanka’s real GDP is expected to fall by 9.2 percent this year and a further 4.2 percent in future.

Sri Lanka has for decades had an economy that is very vulnerable to domestic as well as global shocks. Since independence, the country has run into numerous balance of payment crises and sought IMF assistance many times to escape such difficulties. This time, however, the situation is very diverse and more intricate, as Sri Lanka was compelled to suspend debt repayments to foreign creditors for the first time in its history. Protecting the vulnerable is critical as Sri Lanka fast tracks deep reforms to navigate the deepening economic crisis. The crisis calls for immediate action to protect the poorest and most in need while also focusing on strengthening the social protection system.